August 18, 2016

Equity Research Corp. INTC: Days 2 and 3 Outperform /

 This week we attended the Intel Developer Forum (IDF) in San Francisco. In this note we present our notes from the second and third day of IDF, and for Sector: Semiconductors completeness we have also included our notes and commentary from the first day (which we published earlier this week). Future technology themes that ran Overweight through many of the presentations included Artificial Intelligence and Deep Learning, Autonomous Driving, Virtual Reality, 5G Communications. Intel emphasized its goal of providing end-to-end solutions for many of these major Company Note

trends. We think that Intel’s strength in processor technology and breadth of processor offerings, and its commitment to building out its communications 2015A 2016E 2017E EPS Curr. Prior Curr. Prior capabilities position Intel well to benefit from the large growth in computing and Q1 (Mar.) $0.41 $0.42 A NC $0.56 NC data that we expect over the next several years. We are reiterating our Q2 (June) 0.55 0.27 A NC 0.57 NC Outperform rating on Intel; Intel remains our top pick. Q3 (Sep.) 0.64 0.60 NC 0.73 NC Q4 (Dec.) 0.74 0.73 NC 0.85 NC  In our view Intel’s processors dominate the data center. With Xeon Phi and FY $2.33 $2.02 NC $2.70 NC FPGAs (field programmable gate arrays) in addition to Xeon processors, CY $2.33 $2.02 $2.70 Intel has a full portfolio of products to address the accelerator/coprocessor needs FY P/EPS 15.0x 17.3x 13.0x of artificial intelligence and deep learning. Intel’s Core and processors and Rev.(MM) $55,355 $58,135 $64,000 dominant presence in PCs and data center make Intel a key player in virtual Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful reality. Intel’s broad range of processors and 5G capabilities position Intel well in V = Volatile, = Company is on the Priority Stock List autonomous driving technology, in our view.

 Intel presented data showing that 10nm technology will offer good manufacturing cost advantages, in line with the 14nm and prior technology transitions. It is not clear that Intel will be able to get back to a 2-year technology cadence on the 10nm node. The 10nm node will not use EUV (extreme ultra-violet lithography) technology. Intel has developed its first 7nm technology as an all-immersion (no Ticker INTC EUV) technology, though Intel might use EUV at some point on its 7nm node if Price (08/18/2016) $34.97 EUV machines achieve the appropriate manufacturing capability. 52-Week Range: $24-36  After what we view to be a period of relative silence over its foundry efforts, we Shares Outstanding: (MM) 4,754.0 were interested in some foundry announcements Intel made on the first day of Market Cap.: (MM) $166,247.0 IDF. Spreadtrum is designing on Intel’s 14nm foundry platform. LG will be using S&P 500: 2,187.02 Intel’s 10nm foundry process for a mobile chip platform. ARM will be working Avg. Daily Vol.: 22,907,200 with Intel to offer ARM IP on Intel’s 10nm process. Intel’s Altera division Dividend/Yield: $1.04/3.0% announced that it will deliver its first 14nm FPGA (field programmable gate LT Debt: (MM) $24,053.0 array) product next quarter. LT Debt/Total Cap.: 28.2%

Valuation Range: $40.00 to $50.00 ROE: 8.7% Our valuation range is based on an approximate multiple of 15-18.5x our FY2017 3-5 Yr. Est. Growth Rate: 13.0% EPS estimate of $2.70. This is within the range in which Intel has traded in the CY 2016 Est. P/EPS-to-Growth: 1.3x past. Company-specific risks include competition from AMD and rising capital Last Reporting Date: 07/20/2016 spending. Sector risks include the possibility of decelerating growth in PC shipments. Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters

David Wong, CFA, PhD, Senior Analyst Investment Thesis: (212) 214-5007 Intel has a dominant position in a market we view as attractive (microprocessors [email protected] for PCs). We think Intel has a strong lineup of products that will help it gain Amit Chanda, Associate Analyst microprocessor market share. Intel also has a history of strong roadmap execution, (314) 875-2045 enabling it to maintain a leadership position in microprocessor technology. [email protected] Keith Kan, CPA, Associate Analyst (212) 214-5066 [email protected] Joy Zhang, Associate Analyst (212) 214-8017 [email protected] Please see page 12 for rating definitions, important disclosures and required analyst certifications All estimates/forecasts are as of 08/18/16 unless otherwise stated.

Wells Fargo Securities, LLC does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report and investors should consider this report as only a single factor in making their investment decision.

WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

This week we attended the Intel Developer Forum (IDF) in San Francisco.

Future technology themes that ran through many of the presentations included:  Artificial Intelligence and Deep Learning  Autonomous Driving  Virtual reality  5G Communications.

Intel emphasized its goal of providing end-to-end solutions for many of these major trends. We think that Intel’s strength in processor technology and breadth of processor offerings, and its commitment to building out its communications capabilities position Intel well to benefit from the large growth in computing and data that we expect over the next several years. We are reiterating our Outperform rating on Intel; Intel remains our top pick.  Intel’s Xeon processors dominate the data center.  With Xeon Phi and Altera FPGAs (field programmable gate arrays) in addition to Xeon processors, Intel has a full portfolio of products to address the accelerator/coprocessor needs of artificial intelligence and deep learning.  Intel’s Core and Atom processors and dominant presence in PCs and data center make Intel a key player in virtual reality, in our view.  Intel’s broad range of processors and 5G capabilities position Intel well in autonomous driving technology, in our opinion.

The following are our notes from a number of sessions that took place in the second and third days of IDF. For completeness we are also including our notes from the first day which we published earlier this week.

2nd Day Keynote - Murthy Renduchintala, Intel President

3 themes  Pervasive computing will drive a proliferation of data  Compute, analytics and storage will be distributed throughout the network. o For example, autonomous vehicles can collect large amounts of information that can be shared with other vehicles close by.  The smart future enabled by connectivity o With the shift to 5G compute and communications will converge o Intel plans to play a role in end-to-end deployment of 5G . 5G will enable the interconnectedness of everything . 5G will not be a single homogenous network. The key to 5G is that all the different networks are managed in a seamless manner.

Data Center

 Machine learning o Machine learning is simple math applied at massive scale . This is a small part of overall data center use today but one of the fastest growing forms of workload . Machine learning is a subset of machine learning in which there is more than one level of computation between the input and output. Today deep learning typically involves 2, 4, or 8 levels of computation. . Intel estimates that in 2015,  About 7% of all servers were used for machine learning and deep learning.  Within this 7% Intel believes that: o 95% used Intel processors exclusively (presumably, in a small number of cases, including Xeon Phi coprocessors) o 2.5% used Intel processors together with GPU-based coprocessors (primarily, we believe, Nvidia’s Tesla products) o 2.5% used other types of processors, such as SPARC or Power. o We think these numbers are at least qualitatively correct in indicating that Intel dominates the server processor space and that a relatively small number of servers use coprocessors at all. . Intel believes that Xeon Phi has an advantage in that it is inherently scalable – that many Xeon Phi chips can be linked together to work on a given task.

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WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT

. Machine learning and deep learning involve training and scoring.  In training large amounts of data are analyzed to create a model. o Training is compute-intensive. Intel’s Xeon Phi offers good performance and scalability (more than one Xeon Phi can work together) for training.  In scoring trained models are applied to new data to generate predictions – this is the testing and actual use of the learning. o Xeon processors can be used for scoring. o An Altera FPGA can work with a Xeon processor for scoring. o Intel’s acquisition of Nervana gives Intel additional software and expertize in the deep learning space.

 Accelerators o Computational acceleration can be achieved in several ways: . Within the processor instruction set, by having special instruction for specific tasks.  For example in the AVX (advanced vector extensions) instructions accelerate floating point calculations. . On the processor die, by including specialized circuity (IP – intellectual property - blocks).  For example Intel’s Quick Sync Video circuitry accelerates video. . Within the processor package - separate accelerator chips can be packaged together with the processor  Intel has begun offering processors packaged together with Altera FPGAs. . On the processor interface – custom chips (ASICs – application specific integrated circuits) can be designed to directly interface with the processor.  Intel has helped some of its big datacenter customers to develop ASICs which can connect directly to the processor bus. . On a standard Interface  Coprocessors such as Nvidia’s Tesla products can connect to standard buses such as the PCIe bus within a server.  Intel that of all the various ways of implementing acceleration, connecting to the processor via a standard interface involves the most delay in communications between the processor and the accelerator.

 Coprocessors/Accelerators o Xeon Phi . A guest from Baidu outlined Baidu’s use of Xeon Phi for machine learning/artificial intelligence (AI) in  Natural language, speech recognition  Autonomous driving  Public cloud high performance computing solutions o Baidu has found the greater memory capacity of Xeon Phi facilitates optimization of training solutions . Intel expects to bring out its Knights Mill Xeon Phi family 2017  This follows Knights Landing launched in June this year. However we believe that Knights Mill will have the same circuitry/cores as Knights Landing, but will come with a new instruction set that offers: o Optimization for deep learning o Improved efficiency o Optimization for scale out o Enhanced variable precision o Flexible high capacity memory’ o FPGA’s (Field Programmable Gate Arrays – i.e. Altera’s products) . A guest from Microsoft outlined Microsoft’s use of FPGAs as compute accelerators and network accelerators for accelerate search (Bing) and software defined networking (SDN)

 Silicon Photonics for Communications. Intel is launching its 100 Gb/s silicon photonics product today. o Intel silicon photonics integrates Indium Phospide onto silicon, using silicon lithography to align the laser. Intel believes that this high precision alignment leads to a performance advantage with greater reach and greater density.

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WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

o Intel started shipping its silicon photonics product in June. o Initially the product is targeted for rack-to-rack and across-data-center applications. As bandwidths rise, the company believes that optical communications could move into server racks.

Investor Q&A sessions

Client Computing Group (CCG)

 Intel continues to look to drive TAM (total available market) for CCG, and to richen its mix within its TAM.  The group is focused on cost efficiency, particularly within mobile. o Intel remains on track to exceed its goal of reducing mobile losses by $800 million this year. . The restructuring efforts announced earlier this year will likely reduce costs, but Intel’s decision to discontinue many key products within mobile, such as tablet and smartphone processors, will have a significant impact on revenue potential too, in our opinion. Hence we find it reassuring that overall the company continues to expect to beat its loss reduction target.  CCG is investing to capitalize on segments within the PC market that are growing such as: o 2-in 1 devices o Chromebooks o Gaming o Emerging uses such as VR (virtual reality)  CCG generates profits, help Intel achieve manufacturing scale and contributes to the creation of intellectual property.  Intel believes that innovation does matter in the PC market and so intends to continue to introduce new product families for PCs every year. The company believes that a steady stream of new products is necessary to support pricing, maintain share and support a refresh cycle. o Intel will continue to segment its products to maximize ASP and demand. . The top end Broadwell-E chip with 10 cores is seeing strong demand. o Intel is continuing to invest in finding new use cases for PC processors, such as virtual reality.  Intel typically does not change its pricing structure on existing segments of PC processors, but it does periodically offer more and new segmentation.

Memory

 Intel does not want to be a generic memory company. Its interest is in memory that is adjacent to the computer processor and areas of memory where it can create disruptive growth. o 3D Xpoint offers bigger memory and faster storage o 3D NAND offers denser and lower cost storage.  Intel remains on track for 3D Xpoint to be in manufacturing production by the end of this year, in its joint venture Lehi fab. o The company noted that there is ample capacity to address its 3D Xpoint needs in the joint venture fab. This suggests to us that Intel is not pushing to bring 3D Xpoint quickly into its own fab in .  Intel started first 3D NAND wafers in its fab in China last month and expects production output this year. The initial process in the fab is a 32 layer 3NAND process. The Intel-Micron joint venture expects to have a 64 layer 3D NAND processor in 1H2017 and at some point Intel will transition to the 64 layer process in its China fab.

Programmable solutions (FPGAs – field programmable gate arrays – Altera)

 The 14nm 10 chip is scheduled to begin sampling next month  Work is progressing on designing 10nm products and looking ahead to 7nm.  Some areas that Intel/Altera sees as important drivers of FPGA growth going forward include automotive, connectivity and datacenter.  One important advantage of FPGAs as accelerators in the datacenter is the way that an FPGA can almost instantaneously be reconfigured for different acceleration functions as required by the changing workloads coming into the data center at different times of the day.

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WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT

o In deep learning applications FPGAs are particular useful in scoring (evaluating which are the best algorithms) as opposed to training (processing large amounts of data to create algorithms). . In our view, with its Xeon Phi family and its FPGA products, Intel has a strong product line to address the full range of accelerator/coprocessor opportunities of the future. In addition, Intel has a dominant position in selling the processors that accelerators and coprocessors attach to. We think that these factors will give Intel a strong competitive advantage in the accelerator/coprocessor market in the future.

Financial

 Memory costs will likely rise in 2H16 as Intel ramps its fab in China.  Intel expects to be able to bring down inventory by a meaningful amount in the second half of 2016. The inventory build in 1H16 was driven by: o Softer unit demand o A jump in 14nm yield in the March quarter and a further increase in the June quarter. o The inclusion of inventory from the Altera acquisition, written up to the selling price of the inventory. . Intel expects to bring down fab utilization through 2H16. The company does not expect that 14nm utilization will fall to the point at which it would need to take excess underutilization charges.  Intel expects to continue to do a large number (several tens) of small “tuck-in” acquisitions per year. These deals are typically aimed at acquiring key pieces of intellectual property, technology or market position. o The company tends to do large acquisitions (such as Altera) relatively infrequently. For large acquisitions Intel needs to determine that there is a strong strategic fit and interesting intellectual property. In general for a large acquisition Intel needs to see some benefit beyond just acquiring customers.  Intel’s choices in its recent restructuring reflect being selective in where it participates in the client space. The company discontinued products for which it had decided the product was not going to have a leadership position.

Autonomous driving

 Intel estimates that today it has $100-200 addressable silicon bill of materials in a partially automated car. By 2025 the company estimates that for a Level 5 full automated car its addressable silicon content might have grown 10-15x this amount.  Intel believes that it is well positioned to provide the end to end autonomous driving solutions o For vehicles Intel has: . Xeon, Core and Atom processors . 3D Xpoint memory . Bluetooth and other communications capabilities (including, in our view, WiFi, LTE [long term evolution] modem and 5G capability) . FPGAs . Solid State Drives o For networks (connecting autonomous vehicles to each other and the cloud) Intel has: . Wifi and 5G . FPGAs . Xeon Processors . Wind River software o For Cloud (connecting to autonomous vehicles) Intel has . FPGAs, . Xeon and Xeon Phi processors . 3D Xpoint memory . Solid state drives.  A guest from Baidu noted that Baidu and Intel have been working together on Baidu’s data center need for some time and indicated that this collaboration has expanded to artificial intelligence and autonomous driving applications for which Intel brings hardware and Baidu software expertise. Baidu expects: o Within 3 years it will achieve commercial operation of autonomous driving o Within 5 years it will achieve mass production of autonomous driving o Within 15 years most vehicles will be autonomous.

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WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

For completeness, we have included below our notes from the first day of IDF, which we published in a separate note.

CEO opening keynote

 Redefining the experience of computing o Virtual Reality/Augmented Reality/Merged Reality (VR, AR and MR) . Intel introduced its Project Alloy, an all-in-one Virtual Reality headset with computer, graphics, camera (Intel Realsense) and communications capabilities. . Intel has a partnership with Microsoft to optimize hardware and software for VR/AR/MR. o Intel is driving virtual reality content creation capabilities with more powerful processors and its Realsense 3D camera technology. . Intel is already shipping its next generation processor to PC partners with Kaby Lake PCs expected to launch to consumers in the Fall of this year.

 Building a world of visual intelligence o Intel Realsense camera technology can be used to measure depth, relative position, relative orientation. . This capability is critical for robotics o Intel’s Project Aero offers camera, LTE communications, controller and mapping technology for drones. o Intel’s Euclid module offers compute, communications and Realsense 3D camera technology in a small form factor, the size of a candy bar. o Intel highlighted its alliance with BMW and to develop autonomous driving technology. . Intel aspires to be at the heart of autonomous driving systems . BMW is targeting the year 2021 to achieve levels 3 (capability of a vehicle to take over control), 4 (driving with no driver intervention) and 5 (driving with no driver) capability.

 Enabling cloud and other capabilities to support new computing innovation o Intel expects computing will become mobile and ubiquitous o The rise of the internet of things will help drive this. o The cloud itself will be transformed by the flood of data that would need to be analyzed and interpreted. This will require distributed computing – computing at the edge, in the middle and in the cloud. . New sources of data and drivers of computing include  Autonomous vehicles  Smart Hospitals  Airplanes  Smart Factories  Smart Cities o Intel’s Curie module includes a computing SoC (System on chip), bluetooth radio capability, sensors and battery charging capability for digitizing movement. o Intel’s Joule platform features computing, memory, communications and camera support for internet-of-things applications and smart devices.

Intel Manufacturing Technology

Below we lay out some details from slides Intel presented, providing details on its 10nm technology. The key conclusion is that 10nm technology will offer good manufacturing cost advantages, in line with the 14nm and prior technology transitions, even after the extended time between transitions (about 2.5 years, up from 2 years in the past) is factored in.

Intel noted that its 14nm and 10nm nodes will probably have a longer life than previous technologies, and that it was not clear that Intel would be able to get back to a 2-year technology cadence on the 10nm node.

The 10nm node will not use EUV (extreme ultra-violet lithography) technology. Intel has developed its first 7nm technology as an all-immersion (no EUV) technology, though if EUV machines show sufficient

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WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT manufacturing stability in time, the company will consider swapping in EUV for some layers in the 7nm technology lifetime. Currently the available EUV lithography tools do not show the manufacturing capability that Intel requires. Intel expects to still achieve an improvement in density and cost at 7nm even with an all- immersion process.

 Intel believes its transistor scaling has continued to lead other major logic chip manufacturers and foundries. o Intel’s transistor gate pitch (the width of a gate and the space between transistor gates – i.e. how closely transistor gates can be packed together on silicon) has dropped at a rate of 0.76x per generation. . Intel’s 10nm technology will continue this trend. At 54 nm (nanometers) gate pitch Intel believes that it will have the smallest transistor gate pitch in production of any chip manufacturing company for many years.  Intel showed a graph of its data suggesting that at the 45/40, 28/32 and 20/22 nm nodes gate pitch was comparable between Intel and other manufacturers (we suspect Intel is referring to TSMC and Samsung), though Intel had a manufacturing advantage in being first to each node, by about 2 years.  Intel believes that its gate pitch at 14/16 nm, about 70nm, was tighter than other manufacturers with gate pitches of close to 70nm or even 80nm. Similarly at 10nm with a gate pitch of 54nm Intel believes that its transistor packing density will be far better than other chip manufacturers which it believes have gate pitches in the 65-70nm range. o With the gate pitch progressing along trend, Intel has managed to create technology layout rules so that its logic cell area (determined by logic cell height) drops by more than the 0.46x per generation at the 14nm and 10nm nodes, leading to even greater transistor packing density improvements at these two nodes that in the prior 22nm and 32nm generations. With this better-than-normal improvement in packing density, even with the longer time between transitions, Intel has tracked in line with its longer term scaling per year trend through the 14nm and 10nm transitions. . Intel believes that other chip manufacturers might have had somewhat smaller logic cell areas than Intel at the 40/45, 28/32 and 20/22nm generations, but that its leads the others with a smaller logic cell at the 14/16nm and 10nm nodes. Intel’s graphs suggest that it believes other manufacturers may have logic cells than might be about 2.5x larger that its own at the 10nm level. . However, given the extended ’s 14nm and 10nm transitions, we believe that TSMC and Samsung will have 10nm technology available close to when Intel does, in contrast to prior generations when Intel had a clear lead over other manufacturers in moving to smaller nodes. o For the 14nm and 10nm technologies area per transistor has dropped more than the historical trend, while cost per given area of silicon has risen above the previous rate. The net result of these two trends is that cost per transistor has still dropped slightly more at the 14nm and 10nm notes at a better rate than the longer term trend.  The improvement in transistor performance-power has tracked the longer term trend at the 14nm and 10nm nodes.  Intel noted that it has an enhanced 14+nm technology provides a 12% process performance increase over the original 14nm technology and supports new leading-edge products through 2017. Similarly the company is working on multiple 10nm technologies, to include 10+, 10++ technologies in the future. The expanded 10nm feature set provided by these variations of 10nm technologies will include: o High performance logic transistors o Low leakage logic transistors o Analog design transistors o High voltage input-output transistors o Precision resistors o Metal-insulator-metal capacitors o Varactors (variable capacitors) o High inductance inductors . Intel will also have a variety of 10nm metal interconnect options – low cost, high density and high performance options.  Some areas of ongoing research for future manufacturing technologies include: o III_V o 2D materials

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WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

o Interconnect o 3D o Nanowire o Qubit o Other devices beyond CMOS o Material synthesis o Dense memory

Intel’s Foundry Efforts

After what we view to be a period of relative silence over its foundry efforts, we were interested in some foundry announcements Intel made.

 Spreadtrum is designing on Intel’s 14nm foundry platform. o Intel had a prior agreement to work with Spreadtrum on chips for smartphones. However, Intel discontinued development of future SoFIA smartphone products earlier this year, in conjunction with its restructuring. This latest foundry announcement confirms that there is an active ongoing partnership with Spreadtrum, which Intel owns a stake in.

 LG will be using Intel’s 10nm foundry process for a mobile chip platform.

 ARM will be working with Intel to offer ARM processor core IP (intellectual property) and Cortex series processor IP on Intel’s 10nm process. Support will first be available for this in 2017.

 Intel’s Altera division announced that it will deliver its first 14nm FPGA (field programmable gate array) product next quarter.

 Intel noted that it is focusing on 2 specific segments for foundry business – mobile and advanced networking infrastructure.

5G Communications technology

In our view, Intel has a rich range of products and capabilities which should help it establish a strong position in 5G, including a broad range of processor capability for IoT, computer, networking and server applications, FPGA (field programmable gate arrays) from its Altera acquisition which are used extensively in communications infrastructure equipment, LTE modem technology, and WiFi and a range of other wireless technologies.

 Intel sees 5G communications as a transformative force. Some applications which might use or be enabled by 5G technology include: o Smart cities and buildings o Consumer premises equipment, drones, phones and tablets o Massive machine to machine communications o Machine learning o Health o Autonomous Driving o Virtual reality gaming o Work and play in the cloud o 3D Video and ultra-high definition screens  While 4G enabled faster data rates, 5G facilitates creation of reactive, smart and connected devices. One key new feature of 5G usage might be machines being connected together, not just people being connected. 5G represents the convergence of computing and communications.  Intel is interesting in powering 5G from end to end: o Smart devices o Radio access technology – LTE (long term evolution – 4G), mmWave (millimeter wafer), Wi-Fi, IoT (internet-of-things) . 4G will be the communications fabric on which 5G is built o Access networks o Core networks – NFV (network functions virtualization), SDN (software defined networking) o Cloud  Intel’s 5G ecosystem collaborators include: o Ericsson

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WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT

o Verizon o Vodafone o SK o China Mobile o ZTE o NEC o NTT Docomo o Nokia o Sprint o Mobileye o AT&T o KT o Telefonica o LG o Cisco o Tmobile o BMW

Press Releases Intel Issued on August 16, in conjunction with IDF

Intel introduces Project Alloy. At 2016 Intel Developer Forum, Intel introduced Project Alloy, an all-in- one virtual reality solution that leverages Intel’s RealSense technology. Intel’s Project Alloy Head Mounted Device (HMD) allows users to experience virtual reality without being connected to a high-performance personal computer. Project Alloy headsets feature RealSense technology, front-facing 3-D camera technology, which allows users to see objects in the physical world and use their own hands to interact in the virtual world and execute commands without using any external sensors or cameras. Intel is working with Microsoft to optimize Windows-based content and experiences on Intel-based virtual reality devices such as Alloy HMDs. Intel said it will open the Alloy hardware and provide open API (Application Program Interface), allowing developers and partners to make their own versions of the product based on the Alloy design in 2017.

Intel announces availability of Intel Joule platform. At 2016 Intel Developer Forum, Intel announced the availability of Intel Joule platform, a system-on-module (SOM) that features high-end compute, 4K compute, and large memory in a tiny, low power package. Intel Joule platform enables Internet of Things developers, entrepreneurs and established enterprises to turn a prototype into a commercial product faster while minimizing development costs. Intel Joule features support for Intel RealSense cameras and libraries, laptop-class wireless communications (802.11ac), USB 3.0, MPI (Message Passing Interface) CSI (Camera Serial Interface) and DSI (Display Serial Interface) interfaces, multiple GPIO (General Purpose Input/Output), I2C (Inter-Integrated Circuit), UART (universal asynchronous receiver/transmitter) interfaces, and - based operating system tailed for Internet of Things an smart devices. The Intel Joule platform is available in two high-performance configurations: Intel Joule 550x and Intel Joule 570x. Intel Joule 570x developer kit is available for sale at 2016 IDF in San Francisco and expected to begin shipping in September 2016 through Intel reseller partners. Intel Joule 550x developer kit and Intel Joule 570x and 550x platforms are expected to be available in Q4 2016. Intel Joule platforms and developers kits are expected to be initially certified and available for sale in more than 80 countries; availability is expected to extend to over 100 countries by the end of 2016.  Intel Joule 570x  64-bit, 1.7 Ghz (gigahertz) quad-core T5700 processor with burst up to 2.4GHz  4GB (Gigabyte) LPDDR4 (Low Rower Double Data Rate) RAM (Random Access Memory) and 16GB eMMC (embedded MultiMediaCard) memory  Intel HD Graphics with 4K video capture and display  Intel Joule 550x  64-bit, 1.5 GHz quad-core Intel Atom T5500 processor  3GB LPDDR4 RAM and 8GB eMMC memory  Intel HD Graphics with 4K video capture and display

Intel’s 10nm design platform offers customers access to ARM Artisan physical IP. At 2016 IDF, Intel announced that its 10nm design platform is now offering its foundry customers access to ARM Artisan physical IP (Intellectual Property), including POP IP, based on the most advanced ARM cores and Cortex series processors. Intel pointed out that the ARM Artisan platform includes high performance and high density logic libraries, memory compiles and POP IP. Intel noted that its foundry customers can now use the IP to achieve best-in class PPA (power, performance, area) for their design implementations for mobile, Internet of Things, and other consumer applications. Intel noted that over the past years its Custom Foundry has

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WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT developed design platforms on its 22nm (nanometer), 14nm, and upcoming 10nm FinFET (Fin Field Effect Transistor) processes. Intel also noted that its EDA (Electronic Design Automation) and IP ecosystem has been growing, with EDA enablement and certification with partners such as ANSYS, Cadence, Mentor Graphics and Synopsys and partnership with IP companies such as Cadence and Synopsys. Intel highlighted the following foundry success stories:  LG Electronics is expected to product a mobile platform based Intel’s 10nm foundry design platform.  Spreadtrum is designing on Intel’s 14nm foundry platform.  Achronix Semiconductor is producing on Intel‘s 22nm Speedster 22i HD1000 networking silicon.  Netronome is producing on Intel’s 22nm networking silicon – NFP 6480.

Intel and Sony collaborate to make premium 4K movies available on Kaby Lake PCs. Intel and Sony Picture Home Entertainment (SPHE) announced that they are collaborating to make SPHE’s premium 4K movies available on PCS powered by Intel’s Kaby Lake processor. Devices based on Intel’s next generation 7th Gen Processor, Kaby Lake, are expected to allow users to stream SPHE’s premium 4k movies for smooth playback and long battery life, and are expected to be available later in 2016.

Intel and Microsoft collaborate to bring virtual reality to mainstream PCs. Intel and Microsoft announced that they are collaborating on a specification for mixed reality ready PCs and head mounted displays (HMDs). Microsoft plans to publicly release v1 (version 1) of the specification at the Windows Hardware Engineering Community (WinHEC) conference in , China in December 2016.

Intel announces availability of Yuneec drone with Intel RealSense Technology, and Intel Aero Platform Compute Board and Ready-to-Fly Drone. At 2016 IDF, Intel announced that Yuneec Typhoon H drone with Intel RealSense Technology is available now for USD$1,899; Intel also announced that its Aero Platform Compute Board is now available for pre-order at USD $399 on Intel’s website and that its Aero Ready to Fly Drone is expected to be available by the end of 2016. Intel noted that Yuneec Typhoon H with Intel RealSense technology uses intelligent obstacle navigation to avoid object collision and plot alternative course around obstacles. According to Intel, its Aero Platform (Compute Board) for unmanned aerial vehicles (UAV) is powered by Intel Atom quad-core processor and combines compute, storage, communications and flexible input/output in a standard playing cards. Intel’s Aero Ready to Fly Drone is a fully assembled quadcopter that features Intel RealSense technology and supports “plug and play” options such as flight controller with Dronecode PX4 software, Intel RealSense and AirMap SDK (software developer’s kit).

Intel announces several RealSense Technology Development Tools. At 2016 IDF, Intel announced its RealSense Robotic Development Kit, RealSense ZR300 Development Kit, RealSense Camera 400 Series, and Euclid Developer Kit. Intel RealSense Robotic Development Kit allows developers to build robot prototypes that can recognize objects or people and navigate an environment, and includes a compact Aaeon’s UP board and an Intel RealSense R200 camera. Intel RealSense ZR300 Development Kit (ideal for autonomous robotics, drones, and other uses) combines depth-sensing with high-precision tracking, allows for autonomous mapping and navigation (with real-time visual-inertial odometry technology when paired with Intel RealSense SDK for Linux), and features object and person tracking capabilities. Intel’s next generation RealSense Camera 400 series features more than double the number of 3D points captured per second and more than double the operating range compared with the previous generation. Intel Euclid Developer Kit, a plug-and-play platform, allows developers to quickly develop and create applications with RealSense. Intel noted that its Euclid Developer Kit combines sense, compute, and connect capabilities in a small size form-factor; Euclid Developer Kit is pre-installed with a developer-friendly utility application and is equipped with RealSense camera, Intel Atom processor, and wireless connectivity. Intel RealSense Robotic Development Kit, priced at USD$249, is now available for purchase at Intel IDF store, and current online pre- orders are expected to ship starting September 2016. Intel RealSense ZR300 Development Kit is expected to be available by the end of 2016.

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WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT

Quarterly Income Statement-- Intel (Exhibits In Millions, Except Per Share Data) INTC Q1 15 Q2 15 Q3 15 Q4 15 FY15 Q1 16 Q2 16 Q3 16E Q4 16E FY16E Q1 17E Q2 17E Q3 17E Q4 17E FY17E Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17

Revenue 12,781 13,195 14,465 14,914 55,355 13,702 13,533 14,900 16,000 58,135 15,000 15,000 16,500 17,500 64,000 % Ch. Y/Y 0.1% -4.6% -0.6% 1.3% -0.9% 7.2% 2.6% 3.0% 7.3% 5.0% 9.5% 10.8% 10.7% 9.4% 10.1% % Ch. Seq. -13.2% 3.2% 9.6% 3.1% -8.1% -1.2% 10.1% 7.4% -6.3% 0.0% 10.0% 6.1% Cost of Goods Sold$ 5,051 4,947 5,354 5,324 20,676 5,572 5,560 5,960 6,080 23,172 6,000 5,925 6,270 6,388 24,583 Cost of Goods Sold% 39.5% 37.5% 37.0% 35.7% 37.4% 40.7% 41.1% 40.0% 38.0% 39.9% 40.0% 39.5% 38.0% 36.5% 38.4% Gross Margin$ 7,730 8,248 9,111 9,590 34,679 8,130 7,973 8,940 9,920 34,963 9,000 9,075 10,230 11,113 39,418 Gross Margin% 60.5% 62.5% 63.0% 64.3% 62.6% 59.3% 58.9% 60.0% 62.0% 60.1% 60.0% 60.5% 62.0% 63.5% 61.6% R&D$ 2,995 3,087 2,927 3,119 12,128 3,246 3,145 3,100 3,100 12,591 3,150 3,200 3,250 3,300 12,900 R&D% 23.4% 23.4% 20.2% 20.9% 21.9% 23.7% 23.2% 20.8% 19.4% 21.7% 21.0% 21.3% 19.7% 18.9% 20.2% SG&A$ 1,953 1,949 1,910 2,118 7,930 2,226 2,007 2,000 2,000 8,233 2,100 2,100 2,150 2,200 8,550 SG&A% 15.3% 14.8% 13.2% 14.2% 14.3% 16.2% 14.8% 13.4% 12.5% 14.2% 14.0% 14.0% 13.0% 12.6% 13.4% Total Op. Exp. 4,948 5,036 4,837 5,237 20,058 5,472 5,152 5,100 5,100 20,824 5,250 5,300 5,400 5,500 21,450 % of revenue 38.7% 38.2% 33.4% 35.1% 36.2% 39.9% 38.1% 34.2% 31.9% 35.8% 35.0% 35.3% 32.7% 31.4% 33.5% % Ch. Seq. -1.8% 1.8% -4.0% 8.3% 4.5% -5.8% -1.0% 0.0% 2.9% 1.0% 1.9% 1.9% Special Charges Amortization 62 68 68 67 265 90 89 90 90 359 90 90 90 90 360 Restructuring charge 105 248 14 -13 354 1,414 200 1,614 0 Purch in proc. R&D Special Charges & Amortization 167 316 82 54 619 90 1,503 90 290 1,973 90 90 90 90 360 Operating Income 2,615 2,896 4,192 4,299 14,002 2,568 1,318 3,750 4,530 12,166 3,660 3,685 4,740 5,523 17,608 Operating Margin 20.5% 21.9% 29.0% 28.8% 25.3% 18.7% 9.7% 25.2% 28.3% 20.9% 24.4% 24.6% 28.7% 31.6% 27.5% Interest & Other 26 -13 -104 -14 -105 -82 -126 -208 0 Gain/Loss on Equity Sec. 32 100 165 18 315 22 478 -75 425 0 Other Income 58 87 61 4 210 -60 352 -75 217 0 0 0 0 0 Pretax Income 2,673 2,983 4,253 4,303 14,212 2,508 1,670 3,675 4,530 12,383 3,660 3,685 4,740 5,523 17,608 Income Taxes 681 277 1,144 690 2,792 462 340 772 951 2,525 915 921 1,185 1,381 4,402 Tax Rate 25.5% 9.3% 26.9% 16.0% 19.6% 18.4% 20.4% 21.0% 21.0% 20.4% 25.0% 25.0% 25.0% 25.0% 25.0% Net Income 1,992 2,706 3,109 3,613 11,420 2,046 1,330 2,903 3,579 9,858 2,745 2,764 3,555 4,142 13,206 NI % of revenue 15.6% 20.5% 21.5% 24.2% 20.6% 14.9% 9.8% 19.5% 22.4% 17.0% 18.3% 18.4% 21.5% 23.7% 20.6% Avg.Shs.Diluted (MM) 4,914 4,909 4,876 4,876 4,894 4,875 4,866 4,876 4,881 4,875 4,891 4,891 4,891 4,891 4,891 EPS $ 0.41 $ 0.55 $ 0.64 $ 0.74 $ 2.33 $ 0.42 $ 0.27 $ 0.60 $ 0.73 $ 2.02 $ 0.56 $ 0.57 $ 0.73 $ 0.85 $ 2.70 Source: Intel, and Wells Fargo Securities, LLC estimates

Company Description: Intel, based in Santa Clara, California, is the world's largest supplier of semiconductor chips. The company designs and manufactures microprocessors, boards, and semiconductor components that are used in computers, servers, and networking and communication products. The company is the world's largest supplier of microprocessors, with a worldwide market share of more than 75%.

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WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

Required Disclosures

Additional Information Available Upon Request

I certify that: 1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or issuers discussed; and 2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report.

. Wells Fargo Securities, LLC maintains a market in the common stock of Intel Corp.

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WELLS FARGO SECURITIES, LLC Intel Corp. EQUITY RESEARCH DEPARTMENT

. Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in the next three months from Intel Corp. . Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from Intel Corp. in the past 12 months. . Intel Corp. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided investment banking services to Intel Corp. . Intel Corp. currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of Wells Fargo Securities, LLC. Wells Fargo Securities, LLC provided noninvestment banking securities-related services to Intel Corp. . Wells Fargo Securities, LLC received compensation for products or services other than investment banking services from Intel Corp. in the past 12 months. . Wells Fargo Securities, LLC or its affiliates has a significant financial interest in Intel Corp.

INTC: Company-specific risks include competition from AMD and rising capital spending. Sector risks include the possibility of decelerating growth in PC shipments.

Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm, which includes, but is not limited to investment banking revenue.

STOCK RATING 1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the next 12 months. BUY 2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market over the next 12 months. HOLD 3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12 months. SELL

SECTOR RATING O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.

VOLATILITY RATING V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.

As of: August 18, 2016 41% of companies covered by Wells Fargo Securities, LLC Wells Fargo Securities, LLC has provided investment banking Equity Research are rated Outperform. services for 38% of its Equity Research Outperform-rated companies. 56% of companies covered by Wells Fargo Securities, LLC Wells Fargo Securities, LLC has provided investment banking Equity Research are rated Market Perform. services for 27% of its Equity Research Market Perform-rated companies. 3% of companies covered by Wells Fargo Securities, LLC Wells Fargo Securities, LLC has provided investment banking Equity Research are rated Underperform. services for 4% of its Equity Research Underperform-rated companies.

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WELLS FARGO SECURITIES, LLC Semiconductors EQUITY RESEARCH DEPARTMENT

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